Crude Jumps Past $64 a Barrel

Evidence of gasoline demand lifts Nymex-traded futures.
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Updated from 1:23 p.m. EST

Oil prices surged past $64 a barrel Friday, continuing a big week, as hedge funds continued pouring money into energy markets in search of new year returns.

Light, sweet crude for delivery in February closed up $1.41 to hit $64.20 a barrel, its highest level in over two months. Front-month crude was trading near $57 a barrel as recently as Dec. 19.

Natural gas soared $1.41 to $9.64 per million British thermal units, the first time it rose this week, as short traders bought back their positions before the close of the week. Natural gas has fallen to price levels it occupied before Hurricane Katrina hit the Gulf Coast and shut down much of the region's oil and gas production.

"We saw some late short-covering today," said Tom Bentz, an oil broker with BNP Paribas Commodity Futures in New York. "Once everyone realizes the downside is done, we'll bounce back next week and trade back around $11."

Heating oil and unleaded gasoline rose one cent to $1.80 a gallon and 2 cents to $1.81 a gallon, respectively. Over the past month, gasoline demand has risen 1% to an average of 9.3 million barrels per day compared to the same period last year, according to the Energy Department.

Prices for crude, gasoline and heating oil have recently defied evidence that existing supplies of the fuels are sufficient to meet near-term demand. The Energy Department said Thursday in its weekly inventory report that natural gas supplies increased 1 billion cubic feet, gasoline climbed 1.4 million barrels and distillates, which include heating oil and diesel, rose 2.1 million barrels last week. Although crude inventories plunged 1 million barrels, it was a smaller decline than had been expected.

The exception to the price trend has been natural gas, which slid Thursday after the Energy Department said inventories rose by 1 billion cubic feet.

Forecasts of continued mild weather have also contributed to the drop in natural gas prices. The National Weather Service expects warmer-than-average temperatures to bathe the country, except for parts of California and Florida, through mid-January. Prices could quickly reverse if the weather becomes cold.

This week, oil prices jumped partly because commodity hedge funds have piled into the contract to diversify their holdings and reap some of the gains that energy markets have racked up in the past year. Crude prices climbed 40% and natural gas prices soared 94% in 2005 after hurricanes closed platforms and refineries in the Gulf of Mexico.

"It seems like funds are buying every commodity they can get their hands on, from crude to gold," said Bentz.

But those gains may not be so assured.

"If, however, they continue to drive up prices, despite fundamentals, the market will inevitably collapse on top of them," said John Kilduff, senior vice president of the energy risk management team at Fimat USA in New York. "Expect to see stories next year about how they have been driven away by losses, when fundamentals drive prices

fall, as they invariably must."

Surging demand has prompted oil exploration companies to increase production. There were 1,464 rigs running this week, an increase of 222 over last year, Baker Hughes, a Houston company that produces drilling and production products for the petroleum industry, said in a report Friday. However, this week's count was down seven rigs compared to last week because drilling is typically slow during the first quarter. Drilling typically peaks in December as companies rush to fulfill their contracts before leases and budgets expire.

High energy prices will likely convince the Organization of the Petroleum Exporting Countries, which pumps 40% of the world's oil, not to cut output at its meeting later this month. The group's 11 oil-producing members have been producing at record levels to meet greater demand after Hurricanes Katrina and Rita shut down much of petroleum production in the Gulf of Mexico.

OPEC officials have been giving mixed signals about whether the group should slash or maintain production at current levels. In December, Iran's deputy oil minister said production should be slashed to keep prices high, but Friday, Mohammed Barkindo, OPEC's new acting secretary general, said output should remain the same.

"It is not likely," Barkindo told

Bloomberg

in Lagos, Nigeria, Friday. "You see what prices are doing now. What would be the need to cut production?"

OPEC delayed its production cuts until its next meeting on Jan. 31. Last month, the group decided to keep output the same to help countries get through the winter and high heating demand.

In trading Friday, the Amex Oil Index was climbing 2.1% and the Philadelphia Oil Service Sector Index was gaining 3.4%. Energy stocks, like

ExxonMobil

(XOM) - Get Report

was inching up 1.8% to $59.31;

Total

(TOT) - Get Report

increasing 1.8% to $131.64, and

BP

(BP) - Get Report

was posting a 2.4% increase to $68.10.

Chevron

(CVX) - Get Report

was moving up 2% to $59.34 and

ConocoPhillips

(COP) - Get Report

was 2.3% higher at $60.92.